Your credit report will have an impact on how easily you get financed to buy a home. Make sure you understand your credit scores and how they impact your mortgage interest rates.
Credit Bureaus and FICO Scores
As you probably know, there are three major credit bureaus that compile credit information: Experian, Equifax, and Trans Union. Each credit report comes with a FICO score. This is a summary of your credit, which lenders use to quickly determine whether you’re a good candidate for a loan. Your credit score will also tell the lenders how much interest you should pay on your loan. This is based largely on creditworthiness. If you look like a good credit risk on paper, you’ll pay less in interest.
Avoiding Credit Report Errors
Many homebuyers are distraught to find errors on their credit reports. Check your credit report annually so you can be sure it’s accurate. Visit annualcreditreport.com, where you can get copies of credit reports from all three bureaus. If you find a mistake, take action immediately. It can take weeks to adjust the information on your report, so provide documentation on why something is a mistake.
Maintaining a High Credit ScoreThere are a few things you can do to keep your credit score high.
- Keep credit card accounts open. This is beneficial to your debt-to-income ratio.
- Avoid maxing out or consolidating credit cards. It’s better to have small balances on multiple cards than a huge balance on one card.
- Stop applying for new revolving credit. You might want to buy furniture for your new home, but don’t open any new accounts at the furniture store. Wait until you close on the home sale.
- Keep your job. Changing jobs right before you apply for a mortgage can be risky.
- Pay all your bills on time, and pay at least the minimum amount due.
- Pay down your debt. This will be attractive to lenders. Start with revolving credit accounts.
- Shop around for the best lending options at the same time. If several mortgage lenders look at your credit report at the same time, that’s normal. But, if you space those inquiries out over weeks or months, your score could suffer.